What is Customer Acquisition Cost?

Small businesses can be so concerned about making a sale that they forget to calculate how much it took to get that sale. How much it took to gain that sale in terms of money, time, and talent is referred to as customer acquisition cost. Sometimes that cost can be very, very high.

How is Customer Acquisition Cost Calculated?

Unfortunately, calculating customer acquisition cost can be tricky. Even though it may not be exact, every business needs to decide what specific sales costs will be the monitored. Some of the items that can be included in the calculation include:

Phone costs

Email marketing

Customer entertainment

Fees (credit card processing fees)

Commissions

Salaries and commissions for salespeople

Salaries for sales support staff

Advertising

Public relations

Travel and transportation

Event fees (e.g., networking meetings)

Website costs

The sheer volume of costs that influence a sale is so high and varied that it can be overwhelming! Monitoring select costs, especially those of a high dollar amount, would be a way to avoid the paralysis of analysis that comes with complex calculations. As well, some costs can also be classed as overhead, making it difficult to extract what portion is administrative and which is sales. So select those factors that have the greatest impact and the greatest cost.

For example, a business may choose to only monitor sales staff commissions and salaries, travel, advertising, and networking fees since those are major dollar outlays that are clearly tied to sales. Then it becomes merely a matter of adding up all the selected costs for a specified period, dividing it by the number of sales made during that period (week, month, year, etc.).

Example: A business finds that their customer acquisition cost is $1,000 and they made 10 sales during that period.

So the example business knows that for every sale it makes within a specified period, it could cost them approximately $100 to acquire that sale.

In some cases, instead of figuring out how much it costs to achieve a certain number of sales, it may be more helpful to figure out the customer acquisition cost for every dollar of sales.

Continuing with the above example, say that the business spends the same $1,000 in sales costs for a specific period. During that period, they make $10,000 in sales. In this case, the cost would be calculated:

So the business can estimate that for every $1 dollar in sales, it will cost them $0.10. Looking at it from a percentage of sales perspective, the business can figure that sales costs are 10% of their total sales volume.

How to Use Customer Acquisition Cost in Sales Forecasting

Say that a business wants to increase its sales. Sales don't happen without investment! But you need to know what that investment might be for sales forecasting.

Using data from the above example, the business knows that it will cost them approximately $100 to gain each new added sale. If the business wants 100 more sales this year, they can budget customer acquisition cost spending to be:

So to get 100 more sales, the business may need to spend up to $10,000 to achieve them.

The same principle can be used to figure out how many sales can be made for a projected increase in costs. Say the business has only $2,500 to spend on increasing sales. Using your algebra skills to solve the above formula for number of sales:

So if the business spends $2,500, they can forecast making 25 more sales within the target period.

Will these sales actually happen if a business makes these customer acquisition investments? Maybe, maybe not. But at least there's a benchmark to which results can be measured. As well, sales costs should be continually monitored in order to make necessary adjustments.

Time Cost of Acquiring Sales

While salespeople's and staffers' salaries and commissions can account for labor cost for customer acquisition, it doesn't necessarily account for actual hours, unless those are tracked. Small businesses and freelancers may not have salaries to pay, but do "pay" in time.

If time is a major cost in achieving sales, it might be worth using time, instead of dollars, to calculate cost. Using one of the formulas from the above discussion:

So the freelancer can estimate that she'll need to spend 2 hours in sales activities to achieve each new sale.

It's All About the Profits

Unsaid, but obvious, from the above discussion is if it costs too much to achieve sales, it will decrease profitability. Therefore, businesses of all sizes need to continually monitor and optimize their sales cost investments.

Here's a real life example. I have tried a couple of freelance sites over the years for writing-related projects. On the one, freelancers bid on available projects. Not too much of a big deal with that. However, the freelancer must sift through pages and pages of open projects in order to locate ones that are a good fit. Then he has to prepare a proposal for every, single one of interest. This can amount to hours on end of chasing and proposal preparation, making the customer acquisition cost very high in terms of time.

Contrast that with another site I use where the buyer sifts through potential freelancers for their projects. If they locate one that is a potential good fit, they message the freelancer and the buying conversation begins. Essentially, the freelancer can spend time doing other things until the buyer makes contact. Of course, critical to getting hired is having an effectively written and positioned sales page on the site. But after the initial effort to make that as attractive to buyers as possible, the time required to pursue sales is minimal. To preserve my precious time, I'll choose to have the Law of Attraction efficiently working for me.

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AUTHOR

Heidi Thorne

20 months agofrom Chicago Area

Hi Larry! Thanks for checking in and glad you found it informative. Cheers!

Larry Rankin

20 months agofrom Oklahoma

Informative terminology analysis.

AUTHOR

Heidi Thorne

20 months agofrom Chicago Area

Flourish, I am so glad to hear that your nonprofit actually does a cost analysis! Especially with emotionally driven causes, board members and volunteers can easily lose sight of the hard dollar costs and labor/time costs (seen it all too often). I'm also glad to see that you've pinned performance to fundraising dollars instead of merely profit. Sometimes a profitable bottom line can mask a myriad of ills. Kudos to you and your nonprofit! Thanks so much for sharing your experience with us!

FlourishAnyway

20 months agofrom USA

The nonprofit that I lead uses these types of analytics for memberships. Instead of "profit" we look instead at fundraising dollars. We have several major methods of raising money, but some involve huge outlays of time and staffing with the opportunity for big rewards. Others involve meager payout for the investment of staffing and time. We do these analyses because we have certain strengths (number of people), a growing need for funding (we fund college scholarships, support a high school academic program), and because other groups have moved in on some of our fundraising sources. It helps us to be strategic in what we ask of our volunteers.

AUTHOR

Heidi Thorne

20 months agofrom Chicago Area

Billybuc, I knew you would get it! When I've realized that my sales costs are spiraling out of control, I know it's time to rethink my strategy, too. Thanks for chiming in and have a terrific afternoon!

Bill Holland

20 months agofrom Olympia, WA

Such a great point made here, one many small business owners don't consider. I even see it as a writer and an urban farmer...I am constantly aware of this, thanks to my marketing training, and constantly making adjustments because of it. Thanks for the refresher course, Heidi, and Happy Thursday to you.

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